Question

Draw the market demand curve for a Veblen good. What is it that causes consumers to demand more of the good as price increases above a certain price?

Answer 1

Veblen goods are those, which have a distinct characteristic of being unique in the sense that the demand for these products is opposite of what a normal good would see. A Veblen good's demand rises when the price of the good itself sees a major increase. This is because these goods are of a luxury nature.

Expensive watches, shoes, purses, cars etc. or luxury services such as those provided exclusively to the richest sections of the society constitute Veblen goods and services.

As the price of these products increase, their perceived satisfaction level to the end consumer also increases. The consumers believe that when they are spending additional income on the same, they get the luxury title which other people would never be able to get unless they agreed to paying the additional price of the good or service.

Therefore, while for normal goods, the market demand curve is downward sloping, wherein with a reduction in price the demand increases, that for Veblen goods which are considered to be luxury items is just the opposite. Here, the demand increases at an increased price.

The same has been illustrated with the help of the following diagram: -

The above graph represents the market demand curve for Veblen Goods. Here we see that the Initial Price and Initial Quantity rise and with a rise, the demand curve rather than shrinking as in the case with normal goods, rises and moves towards the right. The new demand then runs at an increased price and an increased quantity respectively.

Please feel free to ask your doubts in the comments section.